FOREX-US dollar edges down vs euro and yen before Fed policy meeting

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Markets brace for a Fed hawkish rate cut

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BOJ is expected to hike in December, but fiscal policy in focus

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Euro supported by a more hawkish rate outlook

(Recasts, adds comments, background)

By Stefano Rebaudo

Dec 10 (Reuters) - The U.S. dollar edged down versus the euro and the yen on Wednesday as investors awaited the Federal Reserve policy meeting later in the day which is expected to deliver a so-called hawkish rate cut.

Investors expect Chair Jerome Powell to provide some sort of restrictive guidance after announcing a 25 bp rate cut.

"The Fed Board is the most divided it has been in five years, with two almost evenly split camps. Six members lean towards easing, including two with Make America Great Again affiliations, and six lean towards holding rates unchanged," Kevin Thozet, a member of the investment committee at Carmignac, said.

"Should, as we and markets expect, Powell deliver a 25-basis-point cut this week to satisfy the doves, he will likely accompany it with a more restrictive message to reassure the hawks."

Investors have pared expectations of rate cuts in 2026 on lingering inflation concerns and expectations of a more resilient U.S. economy.

Data on Tuesday showed U.S. job openings increased marginally in October after surging in September, suggesting the labor market is cooling.

White House economic adviser Kevin Hassett, the front-runner to be the Federal Reserve's next chair, told the WSJ CEO Council on Tuesday there was "plenty of room" to cut interest rates further, though he added that if inflation rose the calculation might change.

EURO SUPPORTED BY THE RATE OUTLOOK

Strong economic data and comments from ECB policymaker Isabel Schnabel - who said a rate hike was more likely than a cut - led investors on Monday to price out a European Central Bank rate cut in 2026 and assign more than a 50% chance of a hike in March 2027.

The euro rose 0.10% to $1.1640 as investors focused on its gap with U.S. bond yields and saw little chance of a significant drop in euro zone rates in the near term.

"ECB's Schnabel validated the hawkish expectations of the market on increased adoption of AI technologies and public investments pushing the neutral rate higher," said Andrea Appeddu, strategist at Citi, before flagging that the 2-year euro short-term rate overnight index swap recorded its biggest daily rise in six months early this week.

ECB President Christine Lagarde said on Wednesday the ECB might lift its growth projections again in December given the economy's unexpected resilience to uncertainty and trade tensions.

Markets monitored developments in Ukraine, while the European Union neared a deal to fund Kyiv in 2026 and 2027 that would win backing from at least a qualified majority of member states.

JAPAN'S DOMESTIC POLICY IN FOCUS

The yen was up 0.12% at 156.72 per dollar, after a 0.6% fall towards the 157 level in the previous session.

Against the euro, the Japanese currency sank to a record low overnight at 182.64 and was last down 0.05% at 182.00.

"The yen should find sufficient support ahead of the upcoming BoJ decision, but its policy space will be shaped as much by domestic politics and fiscal aspects as by global (rate) differentials," said Geoff Yu, EMEA macro strategist at BNY.

"Our flows indicate tentative currency flow stabilization, but until markets gain confidence in Japan's fiscal strategy, we doubt exposures will increase based on the yen's traditional safe-haven status," he added.

The Bank of Japan meets next week and is expected to raise interest rates. The market will also follow closely what Governor Kazuo Ueda says about the future policy path.

Expectations of more expansionary fiscal measures in Japan have complicated the outlook for BOJ policy under which rates remain among the lowest in the world, in contrast to its peers elsewhere. Australia's central bank said on Tuesday there was a risk of rate hikes if inflation pressures persisted.

Bart Wakabayashi, branch manager at State Street in Tokyo, said their flows suggested positioning on dollar/yen was neutral but showed buying of euro/yen and Aussie/yen. (Reporting by Stefano Rebaudo; Additional reporting by Rae Wee; Editing by Shri Navaratnam, Barbara Lewis and Alison Williams)